Welcome to my second month Review (October). I just want to remind everyone that I do not offer financial advice, this an opinion blog about money. The main emphasis of this site is that you can earn easy income through dividends and safe option strategies. In the past I purchased dividend stocks, Exchange Traded Funds (ETFS) and sold covered calls. I really did not have much of a plan with my trading. This is the second month of putting together a basic plan. My goal is not perfection but to learn each month and improve my investing strategy. For this second month my hope was to earn more than the first month’s earnings of $1,129 in options premium. Below Is the review on how I did and what I learned in October.
In October I decided to include Delta in my options trading. I did a separate post (Greeks Post) that describes what Delta is and how it works. The post also describes how to use other Greeks but for now I want to keep it simple and only use Delta. I primarily use Delta to lower my risk by staying around an 80 percent probability of staying out of the money. As a reminder my goal is to have the option contracts either expire without assignment or be closed with a healthy profit. This means when opening a call, I want to stay less than a .2000 Delta. The probability of closing outside the money is approximately 1 minus the Delta or 80%. (1 – .2000 = .80) Typically for a call the higher and the further away the price is from the current price the lower the probability. For instance, if a stock trades at $60 and the strike price is $62 with a Delta of .74 then the contract has 26 percent chance of expiring out of the money and will most likely be assigned.
This can be confusing. Let us use an example from the spreadsheet below. The first trade of the month is Proctor & Gamble (PG 11/6 150 C Delta @ .1850). This trade has a strike price of $150 and expires on November 6th. The contract has a Delta of .1850. Meaning it has an 81.5% chance of expiring out of the money. You will notice that this trade did expire out of the money. I also wanted to mention that I denote a call option with a C and a Put option with a P.
Delta works in a similar way for Put Options. However, they are denoted with a negative value. So, a -.2000 would also be represented as an 80 percent probability of expiring out of the money. However, for puts the less the strike price and the further away it is from the current price the lower the Delta will be. Let us use another example to explain this. On the 13th of October I sold a put option for Cisco. (CSCO 11/13 36 P @ -.175) This option contract has an 82.5% chance of expiring out of the money.
In addition to using Delta, I decided to try my first Credit Spread. I also have a separate post for how a credit spread works. (Credit Spread) I am not going to go into a lot of detail here on how a credit spread works. In short, you both sell one option and purchase another option that are in the same class and expire on the same day and have different strike prices. My goals of expiration or close with profit remain the same. A credit spread is more complex and riskier. If you are new with options trading, I would not add this to your trading practices until you feel confident with what you are doing.
Now in summary, October was a better month than September. I earned a total of $1,887.45 on 19 trades and 22 contracts. I had 10 call options and 9 put options. All option contracts have either expired or had a nice profit. A word of caution. I am writing this in January. In later posts you will learn of some contracts that did get assigned. The average for the 18 trades was a little over $99 per trade. Below you can see all my trades. I also included after the spreadsheet some of the things I learned in my second month. Please let me know if you have any questions or comments?
Things Learned:
- Did more trades this month than last and worked with 14 stocks. I spent more time finding investments and spread the trades throughout the month.
- I did two longer contracts that remained open at the end of the month. Both were in DVY which is an ETF that specializes in dividend paying stocks. I like to own DVY due to its high dividend rate and investment in good companies with a long track record of increasing dividends.
- I kept most trades less than .20 Delta. Two exceptions were GLW. Part of the reason for this is that I am willing to sell these and took a higher premium. However, as you can see the contracts expired. I have learned that these stocks and a lot of the value investments have less volatility. Meaning I am often able to trade them without assignment and a good profit.
- The vertical call requires less margin in the account. Typically, it requires the difference between the strike prices on the contracts. However, I am not sure if it is less risky.
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